Paying Points
Some lenders advertise “no points” when trying to get you to
apply for a loan. The points in question are actually a percentage point of
the amount of the loan. In other words, each point equals 1 percent.
Origination points are a fee that lenders charge to recoup some of their
expenses in making the loan-and to make some profit, too. Ideally, you want
to avoid paying any origination points.
Lenders consider your credit score when deciding whether to charge origination
points. If you have a high credit score—over 700 in the FICO system—you
probably won’t have to pay these points. If your score is in the 600s,
you may have to pay one or two; if your score is in the 500s, you may have
to pay three or more.
Discount points are another matter. In this case, you agree to pay one or
more points up front in order to get a better interest rate on your loan.
You may even be able to get an interest rate that is below the going rate
this way (sometimes called a buy-down mortgage). Discount points aren’t
tied directly to your credit score.
To determine whether to pay discount points, you’ll need to get the
lender to quote the loan at both interest rates, then see how much you save
each month and over the life of the loan. Consider how long you plan to stay
in the house; you may not be there long enough to recoup your up-front expense.
You also need to consider whether you can afford to pay 1 or 2 percent of
your mortgage amount, on top of the down payment, closing costs and fees.
Next: Amount of the Loan
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